Pitfalls of reverse mortgages

10 years ago

In my area, daytime TV is flooded with commercials for reverse mortgages featuring seemingly trustworthy celebrities. We have a large retired population in NE PA, which is probably why so many of these commercials are run.

This article from yesterday's New York Times describes a nasty situation heirs can find themselves in.

Pitfalls of Reverse Mortgages

Also, here are links to other articles the paper has run on this subject, including how people with reverse mortgages can end up losing their homes.

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Comments (8)

Elmer J Fudd
10 years ago
There's nothing wrong with legit reverse mortgages. For many elderly people, tapping into their house equity may be the only wealth source they have for living expenses. Many of those ads are from loan brokers - usually a poor choice when getting a mortgage of any kind.

I don't doubt that lower tier and less scrupulous lenders can trip up in complying with the myriad of federal requirements, but it is what it is.

If an heir expects to inherit a house - guess what? It was worth 100, Mom/Dad borrowed 80 against it, it belongs to the bank now. Ignorance is ignorance all the same.
Anyone who wants to inherit a house free of loans is always welcome to provide monthly support checks to the person in need.
alisande
Original Author
10 years ago
I have no interest in (nor knowledge of) reverse mortgages. I just posted this as an FYI for anyone to whom it might be pertinent.
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Ken, I think that you are totally misunderstanding my point of view. First of all, I never got the impression that Cube's dad owned his house fee and clear. She said that he said, Âbut the house and car insurance snuck up on meÂ. I took that to mean house payment, although, it could have meant homeowner's insurance, or real estate taxes. I don't know. But I assumed that he did not own the house free and clear. Also, I could care less about the inheritance. I don't care if I inheret a dime from my relatives, and I guess that I make the presumption that others don't care either. My concern is what is best for Cube and her dad. Sure, she could continue to supplement his income, and write IOUs, but that really is not what's best, because Cube is planning for a layoff, and the money simply will not be there for her to give to her dad. You can't give what you don't have. The RM is a possible alternative, but I don't think it's best for Cube's dad, mainly because, as you said, he may have another 20 years of living to do. That RM is gonna come due eventually. Or, he will tap it out, and then, how will he pay for his living expenses? As stated above, my opinion was not based on the fact that the RM would prevent Cube from obtaining an inheritance. My point was, the best way for Cube to help her dad out of this situation, which she feels a moral obligation to do, is to help him to not spend more than he earns. I'm sorry that you feel that that would be "treating him like a child." But, I disagree. My grandfather does not feel like he is treated like a child. My mother does not insist that he hand his money over for safe keeping. He willingly gives it to her and asks her to hold it (because he is well aware that he is not good with money,) so that if his cars breaks down and cannot be fixed, he can purchase a new one. And, I'm not talking about huge sums. Currently, my Mom is holding $3000 for my grandpa, and that is his entire net worth. In the case of my family, this is not an inheritance issue, it's a looking out for one another issue. No one has $3000 to give to grandpa, but my mom can help him be prepared in case an emergency pops up and he needs money. Perhaps the term "allowance" makes you think of a child. But many adults put themselves on an allowance. It's just the amount of money that they have to spend each week (or month) after they have met all other financial obligations. Call it something else if you like. And, I never called anyone "money stupid." I don't like the term "stupid." But, I would not equate someone who is not good with money with someone who has different money priorites either. Someone who has different money priorities is not necessarily someone who cannot meet all of their financial obligations. Do you see the distinction? I think Anita's last paragraph is a very good suggestion, IF it's even possible for Cube's dad to downsize.
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In the Canadian context, several have suggested that an owner might prefer to avoid the restrictions that are involved with a reverse mortgage (which often add difficulties to the borrower, who is unable to negotiate away from them). It is my understanding that only a few agencies offer them, which allows them to pretty well set the rules as they like. I don't know what kind of mortgage (if any) that a retiree might be able to negotiate with a regular lending agency. I'd be more inclined to at least investigate the possibility of negotiating a HELOC, with fewer restrictions, and the owner could draw funds at times and amounts as needed. One negative aspect might be that the rate on a HELOC is usually variable, I think, which troubles some who prefer certainties. On the other hand, an accountant friend of mine (fellow member of an investment study group) has borrowed substantial amounts and invested in several unit trusts, which avoid tax on themselves by paying out almost all of their earnings each year, which in a number of cases has been between 10 - 15% ... then my friend, who retired from a supplier of parts to auto manufacturers and lacks a pension, happily pays the 4.75% deductible interest cost that he must pay on the HELOC and uses the rest to live on. I made a post over on the "Retirement" forum, a topic related to whether one might need to reconsider retirement, where I referred to a few of such unit trusts ... most related largely to western Canadian oil and gas extraction, mainly the tar sands aspect of it, I think. ole joyful
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Thank you all for your replies. I believe we are going to arrange for the mandatory counseling and apply. I have taken many of your thoughts into consideration. I question why someone would think I should not use the equity in my house for recreational purposes as if this were some kind of "cheating the government" or something. This is a home we have sunk any spare money we've had over the past 38 years by keeping it pristine and up to date. Why should we NOT treat it as an asset and use our equity to enjoy travel etc.? Our four "kids" are all well-off thanks to us footing their college bills many years ago, we have excellent health care which we pay for, we have nursing home insurance, and a vacation home. We are just finding ourselves house-poor lately with our condominium maintenance and assessments in Florida (because of foreclosures!) and just the general cost of living. Even traveling has become much more expensive! And, yes, we sometimes spend too much on the grandkids and just daily living now that we're retired. My only concern is that the condo might be considered our primary residence because we lived and filed taxes there for the past two years, as well as obtained drivers licenses there. (We did not rent this house out....we lived here for about 5 months of each year.) This year we came back to living most of time in the house and have once again obtained drivers licenses here. We came back because of a non-life-threatening health issue - our doctors are here. We intend to keep the condo to use for about 3 months of every year. When I called someone to start asking questions, the first thing they wanted to do was get my name, address, etc....basically "start a file"....I just wanted to ask a question first before going down that road. Thank you all for your help. If anyone has anything to add, I'll keep watching....
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I'll agree with Jason ... "generalizing without specifics doesn't help anyone.." The fees and charges are not enormous ... compare them to a regular FHA forward loan, and the difference in the fees is the origination charge for the Reverse loan, which many lenders waive. There are also new low cost options available. Like any other mortgage product, borrowers need to shop around for the best deal they can find. If people lost everything, then they didn't take the time to understand the product before they took it out or they couldn't manage their money. It takes an informed decision, not dangerous one. Again, as Jason said ... there programs aren't for everyone ... but they certainly help many people who want to stay in their home. And another option is to do exactly what you would do ... but many people would rather stay in their home. Reverse mortgages ARE designed to benefit a homeowner without the means to stay in their home, if that's the choice they want to make.
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chisue
10 years ago
These ads run all over the nation. It must be a good idea -- for the lenders.

IMO these ads entice people to prolong the agony. Many people who take these mortgages will not be IN their old home very long. They will die, require a safer residence or care, or be unable to maintain the home despite the loan. If you need the loan because you are trying to hang on to a home you can't afford, sell the place and use the money to live elsewhere.

One of the reverse-mortgage holders in the article lived only two years after obtaining the loan. Some people would be better served to face the facts that the old homestead is not affordable -- nor is it appropriate for their stage in life.

The health 'n happiness value of remaining 'at home' doesn't necessarily mean the same big home where you raised a family.
marie_ndcal
10 years ago
I too have read warnings about reverse mortgages in Consumer Reports, Good Housekeeping etc and yet, AARP keeps pushing them. They can be beneficial, yet dangerous. Thanks for making us aware of the problems/
sloedjinn
10 years ago
I work as a legal assistant in a large law firm that represents banks in foreclosures. A lot of our cases are reverse mortgages. I can't mention particular reverse mortgage companies, but I will say don't do it! Reverse mortgages, for the most part, due to their nature, can't be reinstated (brought current), only paid off, either completely or through a shortfall pay off amount negotiated with the mortgage company. That makes it a lot harder to get a house out of foreclosure once it is in foreclosure.

The problems for heirs mentioned in the NY Times article are bad, of course, but what is worse is when the company forecloses against a still living mortgagor. Or when one spouse is on the reverse mortgage but the other is not and the one on the reverse mortgage passes and there is no plan or protection in place to stop the reverse mortgage company from foreclosing, making the living spouse effectively homeless, a situation I have seen more than once in our cases.
Elmer J Fudd
10 years ago
The situations you're describing SloeGin can occur all the same with conventional mortgages too.

Unless you're suggesting that unsophisticated or financially naive people should remain renters, I'm not sure what you're saying.
redcurls
10 years ago
How can a reverse mortgage NOT be current? There are NO PAYMENTS due on a reverse mortgage.
arcy_gw
10 years ago
I am confused. A reverse mortgage is selling your house back to the bank..basically. This logically takes it out of the equation as far as inheritance goes. How is that a "problem"? It allows the original owner to stay put--the fact that the children get less..is not the point. Hand the bank the keys and walk away!!

Pitfalls of reverse mortgages

Comments (8)

Elmer J Fudd

alisande
Original Author

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chisue

marie_ndcal

sloedjinn

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Pitfalls of reverse mortgages

Comments (8)

Elmer J Fudd

alisandeOriginal Author

Related Discussions

chisue

marie_ndcal

sloedjinn

Elmer J Fudd

redcurls

arcy_gw

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alisande
Original Author